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Limited Opportunity to Avoid GST Before 2011

Posted Monday, December 27, 2010 by Michael A. Larson

alt text Recent tax changes under The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Tax Act”) have created a small window in 2010 for taxpayers to avoid application the Generation Skipping Transfer tax (“GST”) on gifts to their grandchildren or younger generations.

The GST tax is imposed on gifts and transfers in trust to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor or to related persons more than one generation younger than the donor, e.g. grandchildren. Originally imposed to combat certain life estate gifting strategies that completely avoided estate taxes, the GST effectively prevents the avoidance of one level of estate tax by means of making direct or indirect gifts to the donor’s second generation beneficiaries.

Due to the recent changes made by the Tax Act, transfers otherwise subject to the GST will continue to be subject to the GST, but at a -0- percent tax rate if they are made in 2010. As such, these transfers will be exempt from the GST but will not require use of the GST exemption. Note that donors must still consider potential gift taxes associated with any transfers made in 2010. However, donors that have not used their $1,000,000 lifetime gift exclusion can gift up to the unused exclusion and avoid both gift tax and GST. As with all estate and transfer tax planning, there are a number of considerations that need to be taken into account before deciding to make such a gift, but in the right circumstances, this once on a lifetime opportunity could save substantial taxes on gifts to grandchildren and younger generations.

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One Easy Planning Idea Based on the Recent Federal Tax Bill

Posted Wednesday, December 22, 2010 by Michael A. Larson

alt text As many of you have heard, President Obama has signed the 2010 Tax Relief Act. While, we are still digesting many of the changes, one easy tax planning idea that should be considered by anyone that has a year end bonus coming and is not over the Social Security wage base limit for 2010. Deferring payment of the bonus until 2011 will save 2% on the OASDI portion the Social Security tax that would otherwise be paid. In addition, if income is expected to exceed the wage base in 2011, the OASDI savings will be even higher as the bonus may avoid the OASDI tax completely.

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Governor Signs Amnesty Bill

Posted Wednesday, December 15, 2010 by Michael A. Larson

Just a quick note that the Governor has signed the amnesty bill, discussed in an earlier blog post. The amnesty program becomes effective February 1, 2010.

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Washington Legislature Passes Amnesty Bill in Special Session

Posted Monday, December 13, 2010 by Michael A. Larson

alt textThe Washington Legislature in last Saturday’s emergency special session adopted an amnesty program that will apply to all outstanding penalties and interest as of February 1, 2011 on certain outstanding tax obligations. The amnesty applies only to penalties and interest on B&O tax, public utility tax and both the state and local portions of sales or use tax. The amnesty period begins February 1, 2011, but applies to taxes that were required to have been reported and paid by the taxpayer for periods to February 1, 2011.

To qualify taxpayers must file all outstanding or amended tax returns with respect to which amnesty is requested by no later than April 18, 2011 and make full payment of taxes by May 1, 2011. It also appears that in order to qualify, tax returns for January through April of 2011 must also be filed with the Department by the normal due date; a potential trap for unwary amnesty takers. A yet to be developed application for amnesty must also be filed with the Department by April 18, 2011. Also, taxpayers charged with evasion penalties are not eligible for amnesty nor are sellers who misuse reseller permits or resale certificates.

The biggest drawback to the program is the inability to later challenge payments made under the amnesty program. Taxpayers will need to be careful that they adopt the correct classifications and do not inadvertently overpay their tax obligations. There are a number of other provisions that I will discuss in more detail once this bill becomes law, but this is something all taxpayers with outstanding tax liabilities need to be aware of immediately.

For more information, please contact Ron Bueing at 206-340-2008.

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Nexus Changes in Washington

Posted Friday, July 23, 2010 by Michael A. Larson

alt textIn the last legislative session Washington adopted “economic performance” as the nexus standard for certain apportionable service activities. However, Washington retained its “physical presence” nexus rules for all other B&O taxes, retail sales taxes and other excise taxes.

“Economic performance” nexus rules provide that a company with $50k of Washington based payroll, $50k of Washington based property or $250k of sales to Washington customers of certain apportionable services (or have 25% of the total of either their payroll, property or sales in Washington) will be subject Washington B&O tax on that apportionable income. Companies with less than these amounts of property, payroll and sales in Washington are deemed not to have nexus with Washington in spite of the physical presence that they maintain within the state, but only with respect to the taxation of these apportionable services.

Meanwhile, “physical presence” nexus continues as the standard for retail sales tax, B&O tax on other activities and other excise taxes. “Physical presence” nexus as interpreted by the Washington DOR requires an extremely limited amount of physical presence satisfied by as little as 2-3 visits by an employee or independent contractor.

Another recent change is that Washington has eliminated its notorious 5 year nexus rule, for Washington B&O tax. This rule provided that a taxpayer was presumed to have nexus in Washington for the year in which nexus was established and for each of the next four years unless the taxpayer could prove that the nexus creating activity was not a factor in making the sales in the future years. This proved to be a difficult, if not almost impossible, burden of proof to sustain with almost all Washington auditors. The recent legislative changes reduce this “trailing” nexus to one year, but only for Washington B&O taxes, not for retail sales tax collection.

These changes could lead to some bizarre situations where taxpayers have nexus for B&O tax for some sales, but not for others and still different nexus for retail sales tax. Let’s look at the following hypothetical.

In year 1 Taxpayer sells $4M of retail goods to Washington consumers over the internet. Taxpayer also provides $200k of training and support services to Washington customers, of which $20k are performed in WA on four separate days in Year 1 by an independent contractor hired by Taxpayer to teach four different customers how to use the retail products. This is the only physical presence in WA for the taxpayer ever. Taxpayer has -0- Washington payroll for any of its employees and -0- property in Washington during years 1 through 5. Taxpayer has total sales over $12M everywhere, which includes 2M of training and support services. Taxpayer provides no training services in WA in years 2 through 5, but provides $200k of online support and training for WA customers in year 2, $300k in year 3, 200k in years 4 and 5. Otherwise, Taxpayer continues to make similar online retail sales and service sales throughout the remainder of the five year period.

Year 1 - Taxpayer has nexus for retail sales tax (RST) and Retailing B&O tax (RBO) because the temporary physical presence of the independent contractor trainers creates physical presence nexus, but taxpayer does not have economic presence nexus for the apportionable services which consequently are not subject to services B&O tax (SBO) as there is only $20k of WA payroll, -0- WA property and $200k of WA apportionable service sales and less than 25% of totals for WA payroll, property and sales.

Year 2 - Taxpayer has trailing physical presence nexus for RST & RBO, but no nexus of any type for SBO.

Year 3 - Taxpayer has trailing physical presence nexus for RST & economic performance nexus for SBO ($300k of sales of apportionable services), but no nexus of any type for RBO.

Year 4 - Taxpayer has trailing physical presence nexus for RST & trailing economic performance nexus for SBO, but no nexus of any type for RBO.

Year 5 - Taxpayer has trailing physical presence nexus for RST, but no nexus of any type for RBO & SBO.

How is that for complicated?

For more information, please contact Ron Bueing at 206-340-2008.

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